WeWork’s troubles darken the outlook for the embattled office market. The struggles of co-working giant WeWork (WE.N) cast doubt on the future of the most significant business centers globally, as an increase in office vacancies is already putting pressure on investors who want to refinance expensive mortgages in the upcoming year.

According to media sources on Wednesday, the New York-based flexible workspace provider, once valued at $47 billion privately, was considering filing for bankruptcy the following week.

WeWork, supported by SoftBank of Japan, set out to transform the office space industry by taking up lengthy leases on huge facilities and leasing the space on shorter, more flexible terms to numerous smaller enterprises.

However, similar to other landlords, it has encountered difficulties convincing specific clients to switch from working from home to the office at its more than 650 sites worldwide since the epidemic. This development has caused uncertainty in the industry.

Reports from eight industry leaders, investors, bankers, and analysts indicate that global office vacancies are projected to rise, negatively impacting rental prospects in New York and London.

Some investors in leveraged real estate would find it challenging to generate enough rental revenue to cover their growing loan payments, they warned.

“The loss of any tenant will have a negative impact on office building cashflows and values, especially during a time of relatively slow office leasing,” stated Jeffrey Havsy, the Commercial Real Estate Industry Practice Lead at Moody’s Analytics.

“This will add to the negative sentiment in the marketplace and make financing harder, especially those buildings that need to refinance in the next 12-18 months,” he stated.

A WeWork representative informed Reuters that the company was in discussions with landlords to resolve “high-cost and inflexible lease terms” and was making an effort to stay in most of its markets and locations.

According to Ed Daubeney, co-head of debt and structured finance, EMEA, at real estate services company Jones Lang LaSalle, “many deals are struck privately between borrower and lender, it’s difficult to estimate the quantity and number of real estate loans that will need to be refinanced in 2024.

According to analysts, the worldwide commercial real estate loan industry is around $2 trillion, with banks and alternative lenders holding roughly a 50:50 share in the U.S. and an 85:15 share in Europe.

Experts consulted by Reuters forecast that 2024 will be a year of reckoning for lenders and real estate investors; time is running out for those who have been ignoring properties that, if revalued today, would violate important loan terms.

According to a September analysis by Savills, the total value of real estate worldwide, including residential, commercial, and agricultural property, was $379.7 trillion in 2022, a 2.8% decrease from 2021.

SLUMP TRANSACTIONS
An increase in transactions, which are essential for monitoring shifts in asset prices, has already impacted refinancings of real estate loans.

The Europe segment of MSCI’s Capital Trends report revealed third-quarter volumes that were 57% lower than 2022 levels, the lowest since 2010.

Furthermore, MSCI said that in crucial office markets, the discrepancy between what investors think assets are worth and what potential purchasers are ready to pay is between 20% and 35%—”far  worse than the height of the global financial crisis.”

According to MSCI, prices in Germany and Britain, the two biggest office markets in Europe, would need to drop another 13% to 15% before market liquidity returns to its long-run norm.

The credit risk assessments that global lenders to U.K. real estate holding and development companies provided to data source Credit Benchmark in October indicated that those companies were now 9% more likely to default than they had predicted a year earlier.

Contrary to predictions a year ago, U.S. industrial and office real estate investment trusts (REITs) were assessed as having a 35.8% higher default risk.

RETRACTING

According to a September report from Jefferies, WeWork has 3.25 million square feet of premises in central London and a total yearly rent roll of 192 million pounds ($234 million). WeWork’s website states that its two most prominent U.S. markets are New York and California, with 49 and 42 locations, respectively.

According to industry insiders, competitors may occupy some of its most well-liked areas at comparable rental prices, reducing landlords’ cash flow problems.

However, according to the Instant Group’s 2023 State of the U.K. Flex Market study released in September, demand for flexible workspace in the country is still 11% lower than before the epidemic.

According to insiders, lenders may use the WeWork fiasco as a lesson and demand that borrowers put more equity into their homes to lower the loan-to-value ratio.

However, if the amount and length of rental revenue remain unknown, this request can become difficult.

The average lease term for offices in central London has decreased from 11.6 years a decade ago to six years, according to BNP Paribas Real Estate, while the number of office vacancies in the city has skyrocketed to a 30-year high, according to Jefferies’ September report.

After recovering rent it had neglected to pay under a short-term license arrangement, U.K. property company Helical announced that it was working on “next steps” for the space at one London building leased to WeWork.

In addition to providing owners with lower-than-anticipated rental revenue, underutilized urban workplaces are aging quickly in a global community that is becoming more conscious of carbon emissions.

Jose Pellicer, head of real estate strategy at M&G Real Estate, stated that “we’re at a massive turning point in the real estate investment market globally.”

“Over the past 20 years, the yield on real estate has outpaced financing costs. However, growth in the 2020s must account for a significantly larger portion of a property return.”